What to do when your client receives a summons

Many people are at least somewhat disconcerted when the IRS delivers a summons. A taxpayer who receives a summons may be under examination, or the IRS may be looking for infor­mation that he or she may have about another taxpayer (called a “third-party summons”).

This column addresses sum­monses when issued in taxpayer exami­nations and is not designed or intended to be a full articulation of the signifi­cant legal implications of a summons or its enforcement. Taxpayers should seek legal advice to consider the implications of a summons.

 If a summons is written properly and delivered as required by law, a U.S. district court can compel compliance. Dismissing a summons out of hand is ordinarily not a good strategy.

 The IRS’s authority to take any and all actions related to a summons derives primarily from Secs. 7602, 7603, and 7604. Provisions on related matters such as enforcement, third-party summonses, and oaths are located elsewhere in the Code.

In most situations, the IRS issues a summons to a taxpayer when it believes the taxpayer possesses information the government needs to examine a return or collect an assessment, and the taxpayer is uncooperative in providing the informa­tion using routine IRS administrative procedures, such as an information document request. The IRS usually issues a summons only after repeated attempts to obtain voluntary compliance have failed.

The summons should provide the name and address of the person sum­monsed, a specific description of the material sought (look for the words “any and all”), including oral testimony, the time and place for the delivery or appearance of the taxpayer, and some information on the reimbursement of reasonable costs for the production of records. Because the time frames con­tained in a summons are usually quite short, the taxpayer needs to act quickly upon receipt.

Ignoring a summons initiates a lengthy legal process that is outside the IRS’s hands. The IRS’s Office of Chief Counsel can only litigate matters in Tax Court. By virtue of Sec. 7402, the jurisdiction for all litigation on sum­monses (including their enforcement) resides in a U.S. district court. Therefore, summons enforcement is the respon­sibility of the U.S. attorneys with the Justice Department.

If the requirements for a summons, generally referred to as the Powell factors (described below), are satisfied, the U.S. attor­ney will decide whether to petition the district court to enforce the summons. Depending on the matter and facts of the case, the district court can decide not to hold a public hearing.

Often, issues arise that may cause the court to limit the production of summonsed documents or testimony. A taxpayer may argue that the information subject to the summons is protected by attorney-client or accountant-client privilege. In these cases, a judge might need to privately review the sum­monsed material and then, probably on a document-by-document basis, decide whether to compel production. Taxpayers have litigated numerous cases on summonses.

The seminal case in this area is Powell, 379 U.S. 48 (1964). In Powell, the IRS issued a summons requesting the taxpayer to provide certain documents, and the taxpayer contested the summons. The Supreme Court outlined four factors—the Powell factors—for the court to consider in a summons enforcement action. They are: (1) The investigation must be conducted for a legitimate purpose; (2) the information sought must be relevant to that purpose; (3) the IRS must not already possess the information; and (4) all required administrative steps must have been taken to attain the informa­tion. When these factors are met, courts generally will compel a taxpayer to comply with an IRS summons.

A taxpayer that believes the IRS has issued a summons for improper reasons may be entitled to question the IRS agents in an evidentiary hearing in a summons enforcement action; however, an unsupported allegation of improper motive does not give a taxpayer the right to examine IRS agents. The Supreme Court recently addressed this issue in Clarke, No. 13-301 (U.S. 6/19/14) (see also “Tax Matters: Supreme Court Sets Standard for IRS Summons Challenges,” JofA, Sept. 2014, page 97). In that case, the IRS had twice before asked for an extension of the statute of limitation on assessment, and the taxpayer agreed to the requests. However, when the taxpayer rejected the third request, the IRS issued sum­monses to other interested parties.

The taxpayer argued that, coming on the heels of the third request to extend the statute of limitation, the summonses raised an inference of improper motive. The Eleventh Circuit held that, based on a bare allegation of improper motive, a taxpayer was entitled to examine IRS agents regarding their reasons for issu­ing a summons. The Supreme Court disagreed, holding that a taxpayer was entitled to examine IRS agents about their motive only if the taxpayer provided some evidence plausibly raising an inference of bad faith on the agents’ part. The Court remanded the case to the Eleventh Circuit to consider whether the taxpayer had made the requisite showing.

Practitioners should carefully consider the facts and circumstances of a client’s examination or collection matter if the IRS issues a summons. The summons should not be ignored, and legal counsel should be consulted to determine an appropriate course of action.

Editor’s note: A version of this article appeared as “Tax Practice & Procedures: What to Do When Your Client Receives a Summons,” The Tax Adviser, Jan. 2015, page 54.

By Barry Shott, CPA (barry.shott@us.pwc.com), senior managing director, PwC’s Advance Pricing & Mutual Agreement and Transfer Pricing Controversy Services in New York City, and a member of the AICPA IRS Advocacy & Relations Committee.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.